Summer wash-out highlights changes to flood insurance market

The summer wash-out has resulted in flooding in many areas. 5.2 million properties in England are now said to be at risk of flooding, twice the previous estimate. It may be time to dust down your insurance policies to check the flood insurance provisions.

Despite the scale of the problem the government and the insurance industry have failed to agree a way to ensure that flood risk insurance remains widely available and at a reasonable cost.

The Statement of Principles: ensuring the availabililty of flood insurance until 2013

Following the floods in Autumn 2000, the Association of British Insurers (ABI) entered into an agreement with the government known as the Statement of Principles. This obliges insurance companies to offer flood risk cover as part of standard policies:

in most cases where the risk of flooding is not significant – a 1 in 75 annual probability of flooding; and

for customers at significant flood risk provided that the government has announced plans and notified the ABI of its intention to reduce the risk for those customers to below significant within 5 years.

This was to ensure that flood insurance remained widely available and as affordable as possible to home owners and small businesses, especially those in high risk areas. Although insurers can price according to risk under the Statement of Principles, this has not been commonly applied because of commercial decisions by individual insurers and historic limitations in the availability of flood risk information.

The Statement of Principles was always intended to be a short term measure. It will end in June 2013.

After June 2013?

The availability and price of flood risk insurance will go back to being determined by the market. The availability of data on surface water flooding as well as river and coastal flooding, and improved flood.mapping and forecasting has made it easier to identify vulnerable properties.

Insurance policies coming up for renewal after June 2012 may be priced on the basis that at least some period of cover falls into the free market period and home owners may see a consequential premium increase. In affected areas:

Homeowners may find it difficult to change their insurance or mortgage provider and find themselves locked into expensive products. Or they may be unable to obtain flood insurance at all and have to pay for flood damage to their properties themselves. They may also be in breach of their mortgage obligations to hold adequate insurance. Click here to read useful advice on this provided by the Government.

Buyers need to ensure that they obtain as much information as possible about the flood risks of the property they hope to buy. They may find it hard to obtain mortgages and insurance at a proportionate cost to the value of the property.

Sellers of properties newly allocated as being at high risk may find it more difficult to sell if buyers find it hard to obtain mortgages.

Landlords and tenants should be clear about the extent of their repairing obligations under their lease and take any appropriate preventative measures.

A way forward?

All parties are agreed that flood cover should ideally be widely available but the method of funding this cannot be agreed. The government has stated its priority is to invest available funds in reducing the risk of flooding in the first place, particularly in deprived communities. The ABI wants to see the end of the market distortions imposed by the Statement of Principles. In July the government released its latest statement on the issue stating that both parties were currently looking formalizing the existing pricing arrangements and maintain the current cross-subsidy in place between policy holders. However the ABI has not commented on this, taking the stance that discussions are ongoing.

We will be monitoring developments in this area but in the meantime will ensure that any dealings with properties in high risk areas are approached with an understanding of the possible financial and practical implications for clients.